The cannabis business is booming — but that’s not necessarily good if you’re an investor

Canopy Growth operations in Smiths Falls, Ontario.

Tom Franck | CNBC
Canopy Growth operations in Smiths Falls, Ontario.

The pot industry faces a “massive inflationary bubble,” and that means investors have to be careful, a cannabis CEO told CNBC at the World Economic Forum in Davos, Switzerland.

“Many, many people are entering the cannabis space, which is terrific, but they actually have to have a purpose — they should be able to generate a business,” said Bruce Linton, chief of Canada-based Canopy Growth.

“Everybody wants to be in the cannabis space, and I think investors have to be selective because … there will be a new name every week,” Linton warned.

The legalization of cannabis for recreational use in Canada last year boosted interest in the industry. Some U.S. states have also approved the use of cannabis. Utah and Missouri approved the use of marijuana for medical purposes in November, while Michigan gave the green light to its recreational use.

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Richard Carleton, chief executive officer of Canadian Securities Exchange (CSE), told CNBC it’s only a matter of time until the United States approves cannabis at the federal level.

It is a matter of “two and half or six and half years, it depends on the presidential cycle,” he said.

Last week, William Barr, who is President Donald Trump’s nominee to lead the U.S. Justice Department, said Congress needs to come up with a plan to overcome the discrepancies between state and federal law. Barr said he is personally against pot, but he opposes a reversal by the former attorney general against a policy that eased federal enforcement of marijuana laws.

The uncertainty about where the U.S. will go will bring volatility to cannabis stocks, according to the CEO of the financial services firm Canaccord Genuity.

“The U.S. — who knows what’s going to happen? Tons of good things could happen, tons of bad news could happen. Therefore you will continue to see a lot of volatility,” Daniel Daviau said.

“Here you’re measuring earnings two years out, and you’re putting a relatively large multiple on that. You don’t need much of a change in attitude to shift the stock price, so you will see a lot of volatility,” he added.

‘Great opportunity’ in the next markets

There are upcoming markets for the cannabis industry, including Israel and European countries. According to Daviau from Canaccord Genuity, “Europe is gonna go nice and slow.”

Ultimately, he said, it’s a “great opportunity, but years in the making.”

Linton recalled: “Who’s got federal legalization on the books? Greece, Germany, England, Denmark, Czech Republic — they are all federally regulated for medical access.”

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The three interviewees agreed that the future of cannabis will come from the medical side, which will subsequently open the doors to wider recreational uses.

“If we reconvene in five years, the proportion which is smoked will be a very small fraction,” Linton said.

“And that’s because medical” will create better product, he added, citing the hypothetical example of anti-anxiety beverages that could be tested medically and then be sold as a way for people to be socially active with greater ease.